British supermarkets are seeing a surge in interest and market activity. Driven by Morrisons takeover news, most grocer shares have risen over the last three months. Amid the sector boost, market leader Tesco (LSE: TSCO) is set to release its interim results on Wednesday. Here’s how I expect the Tesco share price to react after the results.
Tesco share price overview
Tesco’s reaction to the supermarket feeding frenzy has been underwhelming. The supermarket giant’s shares have risen 9.1% in the last six months. In the same period, Morrisons shares have risen 55% and Sainsbury’s shares are up 19%. Is this a reason for concern for Tesco’s shareholders? I don’t think so.
The Morrisons saga has drawn to a close with US firm Clayton, Dubilier & Rice securing a £7bn deal. There are speculations of a potential bid for Sainsbury’s as well. Although a nice jump in the Tesco share price could have been a welcome relief, I do not see this as a big indicator of future performance. The company, valued at over £24bn, looks too big for a takeover. This aligns well with my investment strategy. I prefer not to speculate on foreign investments but focus on stable year-on-year growth.
Where Tesco wins
In 2021, Tesco’s market share grew by half a percentage point to 27.3%. I think this is very impressive considering it is the only one of the Big Four grocers to do so. Its biggest market rivals Sainsbury’s and Morrisons both lost out to Aldi and Lidl.
The sale of its Asian operations for £5bn triggered a special dividend. More importantly, it allowed the supermarket to significantly reduce its debt and bolster its pension scheme. Analysts are predicting a £1.5bn increase in Tesco’s free cash flow and remain positive about the company’s future profitability.
Its online sales increased an incredible 77% (thanks to the pandemic) to £6.3bn which accounted for 12.5% of the supermarket’s total sales in 2020. Although this number will drop in 2021, I expect them to retain a fair share of online sales gained last year.
Hurdles for Tesco
There is no denying that Tesco is fighting hard to hold on to the sales it gained during the pandemic. Sales during the first quarter (Q1) 2021 (for the 13 weeks ended 29 May 2021) rose 0.5% from the previous quarter. But, they were down from the 14.3% peak seen in March 2021. This steep fall in April/May shows how sales have dropped steadily since the reopening of bars and restaurants.
The biggest concern for large supermarket chains is razor-thin margins and the fear of being undercut by discount retailers. Aldi and Lidl are making a push to take a bigger chunk of Tesco’s market share. Aldi has plans to invest £1.3bn in the UK over the next two years to help open 1,200 stores. They currently have 920 stores in the UK.
Tesco share price verdict
Considering the fact that a significant jump in free cash flow looks likely, I think traders might expect a positive reaction to the interim report. But, in the current market climate, this is almost impossible to predict. However, the fundamentals of the group remain promising. I will be watching the Tesco share price closely over this week to judge the market reaction before considering an investment.
